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Market Rebalancing on the Horizon with OPEC Agreement

For the first time in nearly eight years, OPEC has agreed to cut oil production. This move, along with the potential of non-OPEC countries joining in the cut, should accelerate market rebalancing and increase the chances of a rapid oil price recovery, according to Fitch Ratings.

Implementation risks remain, however. OPEC’s adherence to the agreement may be in question, as well as the full cooperation of other participants, particularly Russia. Russia has already stated that it is prepared to cut production by up to 300 thousand barrels of oil per day (mbpd). OPEC has said that non-OPEC entities have agreed to cut by 600 mbpd. Combined with OPEC’s agreement to cut production by 1.2 million barrels per day, the total reduction would account for nearly 2% of global output.

Market oversupply could end just from OPEC’s commitment, with an expected decrease in OECD oil stocks throughout 2017. Fitch Ratings estimates that crude consumption may exceed production by 400 mbpd in the first quarter of next year, increasing to 1,300 mbpd by the fourth quarter of 2017 if the deal is extended past its initial six-month term. Without the deal, oil stocks would remain flat, which Fitch estimates are 300 million barrels above their five-year average.

There is no guarantee that OPEC members will agree to extend the deal. Another risk is that OPEC members will produce above their quotas. Unknown is how quickly the U.S. short-cycle crude production will react to higher oil prices.

Fitch has not changed its view on the long-term price of oil, for which its latest full-cycle cost estimate is $65 (USD).

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